Milestone Group Quarterly: April 2009

Articles

• Face to Face: Patrick Grady, CEO, Rearden Commerce
• Investment Viewpoint: Jason Green, General Partner, Emergence Capital
• By Invitation: Chunka Mui and Paul B. Carroll, Co-Authors of "Billion-Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years"
• Milestone POV: Enterprise Software is Dead - Long Live the Enterprise! by Marc Friend, Milestone Group Consulting Partner

Investment Viewpoint:

Jason Green, General Partner at Emergence Capital

Milestone: Tell us about Emergence Capital Partners. What's the current investment focus and philosophy and how does that show up for portfolio companies?

Green: Emergence Capital was founded in 2003 with a focus on technology enabled services, which includes SaaS, cloud computing and consumer and business services. We identified software as a service (SaaS) as an opportunity after the bubble burst, when most VCs were retreating to traditional areas of VC focus, and made our first investment in Salesforce.com.  We're based in San Mateo and the three founding general partners are Brian Jacobs, Gordon Ritter and I. 

We wanted to leverage our cumulative expertise to offer entrepreneurs something unique - a VC firm that understands how to build a successful services business. After six years, we remain the only firm in the country devoted to this segment and it allows us to deliver unique value because of that focus. All our partners bring relevant expertise and have been entrepreneurs ourselves, so our portfolio companies benefit from our team and our extended network in this specialized area.  

Milestone: Looking broadly at the technology market, what are the future events others should be thinking about, events that may lead to significant disruption in industries or markets?

Green: The platform as a service trend is pretty exciting to us today. It used to take years and a lot of money to build a SaaS application, but Salesforce.com, Google and Amazon (among others) are taking on the heavy lifting and giving developers the means to create an application faster and cheaper, leveraging the infrastructure and built-in marketing of these platforms.

We were the first to fund a company that was built purely on one of these platforms, Maxplore. They have created a field service management application suite on the Force.com platform and we are doing very well. SaaS applications have already shaken up the software industry and if these platforms accelerate innovation, it will be difficult for the established leaders to keep up.

Milestone: Let's talk about the volatile economy. How is it affecting your investment strategies in the long and short term?

Green: It's definitely an interesting time to be in the venture business - it is tough for our entire entrepreneurial ecosystem of LPs, VCs and entrepreneurs. The unfortunate reality is that some good companies with potential may not survive this downturn. Every startup is having its judgment day due to challenging fundraising conditions and not all will make it to the pearly gates.

Honestly, we're staying the course. We made a couple new Series A investments over the past few months, Zuberance and Maxplore, and we continue to see some great ideas and entrepreneurs come through our doors every week. Having survived and, in retrospect, thrived through past downturns, I'm confident it's simply the best time to be investing and building innovative companies. While the bar is certainly higher for new investments, those that thrive in this environment will go on to do even better when the economy improves. We are looking for creative strategies that enhance capital efficiency, in addition to the usual criteria. You can no longer afford to assume that you can raise greater amounts of capital at luxurious prices.  

Milestone: Much has been written in the past 90 days about the turmoil in the venture industry. What's your take on the current crisis and who survives?

Green: As far as venture capital goes, it's as challenging structurally for the business as I've ever seen in my career. We may finally see a shake out occur that has been projected since the early days of 2001. Three things will define winners and losers: first - the character and cohesivesness of the team; second - a differentiated and true value-added strategy; and third - quality of the LP base.

The finest venture capitalists have always been lovers of innovation, entrepreneurship and company building vs. transactional, financial arbitrageurs and momentum players. Perhaps this is an opportunity to wash out the remains of the latter in the industry. I'm also skeptical of the mega-funds ability to deliver venture returns. The model simply doesn't scale from a human capital perspective or make sense anymore from a capital appreciation perspective. Other than the few firms I can count on one hand, I think you'll see fund sizes consolidate to the $200-400 million range, with four to six partners with specialized capabilities.

Milestone: What new companies, categories or industries do you think we will be reading about for the remainder of 2009?

Green: 2008 started as the year of Clean, but ended as the year of the Cloud and that shift has only become stronger in Q1. Even Google and online advertising have taken a back seat in terms of growth, with revenues falling for the first time ever. While Clean Tech rode high with oil over $120 a barrel and financial markets throwing money at the segment, the Cloud has emerged as the true story of disruptive innovation in 2009. The Cloud enables new opportunities with incredible speed, flexibility and affordability that only gets more appealing in a down economy. We are in the midst of an explosion of innovation on that front that has yet to be fully appreciated.

Milestone: What's your view on Web 2.0 and social media? Real or bubble?

Green: I've never really understood what Web 2.0 meant and the longer it's out there, the more it loses its meaning. The rise of the social online medium (not media) is real and transformative for both consumer and business behavior online. I know many younger folks that no longer think of Google search as the fastest and most efficient way of gaining information on the web, but instead view their collective and social networks as a better source of information. Email is being eclipsed by text messaging, IM and Twitter. Whenever there has been a fundamental shift in online behavior, a new set of powerful companies emerge that define that new trend and an ecosystem is built around them that fosters much innovation and opportunity. I think it's interesting to learn that Geocities (purchased by Yahoo for close to $3 billion at its peak) is being shut down, which was the first generation of user generated content and community. MySpace and Facebook will emerge as powerful and leading web properties but my guess is that they will have an even shorter half-life in terms of their relevance. 

Milestone: What would you say is the story with innovation today?

Green: The current downturn will only further catalyze an ever increasing innovation cycle as many folks who were once satisfied and complacent have been shaken and realize there is no safety anymore. The day Citibank became a penny stock and with GM on the brink of bankruptcy, the rules have fundamentally changed. The only truly risky behavior is assuming there is no risk. That, on top of the tsunami of educated and connected individuals globally who want to realize their dreams and pave the way for a better life, will unearth more innovation and disruption in the next decade than we've seen in our careers.

While it may be awhile before we see the emergence of another global powerhouse like Oracle, Google or Microsoft, my guess is that the behemoths of the future will be started in 2009 or 2010. The crisis conditions that give rise to great companies are the same conditions that shape and define the essence of great human character. Lance Armstrong became the great racing champion that he was only after surviving cancer.

Milestone: What advice would you give to an entrepreneur at this point in time, particularly on raising capital and working with a VC?

Green: It's never been more important to do your homework on your potential VC partner. While all money is green, all capital is not created equal. Do no harm is the first rule of any successful investor and unfortunately there are many in the business today that are reacting to this crisis by exercising their own demons on the unsuspecting and ill-prepared entrepreneur. All it takes is one bad apple in the basket (or on the board in this case) to ruin a company. In times like these, the board should be coalescing to fight the battle in the marketplace, not in the board room. All that being said, a strong CEO and leader is ultimately in control and needs to exercise their leadership, or risk being henpecked into average decisions or worse, paralysis. Your job is not to make everyone happy, but to use your best judgment after gaining everyone's input. Be willing to test your vote of confidence or step aside; there is no viable alternative.

In terms of raising capital, the best advice I can give is not to need it. The cheapest and best source of capital has always been customers. Apart from that, realize that the bar has gotten higher for everyone. What seemed riskless before has taken on the perception of being risky. Demonstrating a track record of progress and building a relationship of trust is incredibly important. While this will take longer, you will be better off having investors join with eyes wide open and starting from a foundation of trust. All this means is that you need to assume things will take longer than you expect. As I've always said, fundraising success is inevitable, it's simply a matter of how much pain you can take. Some get lucky and breeze through the process, but invariably that's a function of many years and unseen and under-appreciated preparation. 

Milestone: Is there a company that you personally, and not necessarily the company or the firm, passed on that made you think you wish you had that one to do over?

Green: One of the nice things about our strategy is that while we are focused on technology-enabled services as a category, we are fairly stage agnostic. That means we get multiple bites at the apple if we miss something in retrospect. So if there is a company I had the opportunity to invest in, that I passed on and now regret, it's still in our pipeline and therefore off the record.

One opportunity that we missed that is no longer available is DoubleClick, in which I was an investor earlier in my career and prior to its IPO.  When we were forming Emergence, we were just closing on our first fund and might have had the opportunity to participate in taking the company private. It turned out to be a blockbuster deal in a very short period of time and I could have made money on that company twice, but that's getting pretty greedy.    

Milestone: If you were an LP and had $20 million to put into any other venture fund than your own, what would it be and why?

Green: I'd allocate $100 million and approach 3-4 established firms of $1 billion or more and attract the best younger, but proven, GPs and offer them an opportunity to start a new firm with no initial fundraising risk, as long as they invest a minimum of 2.5% of the capital. Of course you'd probably lose the opportunity to invest in that fund going forward, but probably not a big loss in my opinion. There are tremendous seeds of discontent being constrained by the chains of riskless embedded management fees, with limited upside professionally and financially. Not many folks are willing to go through what I had to, to start my own firm. That being said, I skip to work every day, so it was worth all the risk and patience required.

_____________________________________________

Jason is a founder of Emergence Capital and has over a dozen years of experience in the venture capital business as a General Partner with Emergence, a General Partner with USVP and as an Associate and Kauffman Fellow with Venrock, the venture capital arm of the the Rockefeller family. Earlier in his career, Jason served as VP of Muzertechnika, the largest private computer and Telecommunications Company in Eastern Europe. Prior to this, he served as a strategic consultant with Bain & Company and with the investment firm of Welsh, Carson, Anderson and Stowe. Jason has led successful early-stage venture investments in past companies such as DoubleClick (DCLK), aQuantive (AQNT), Visual Networks (VNWK), SuccessFactors (SFSF) and Ask Jeeves (ASK) and currently serves on the boards of private companies such as Lotame, TouchCommerce, Kidzui, Goodmail Systems and Maxplore.

Jason is Chairman Emeritus and on the Board of the Center for Venture Education and the Kauffman Fellows Program, the leading educational fellowship in venture capital. Jason also serves on the Advisory Board of Arthur Rock Center of Entrepreneurship at Harvard and on the Steering Committee of the West Coast Research Center. Jason is a founding board member of Endeavor, a non-profit serving the needs of entrepreneurs in emerging markets.

Jason graduated cum laude with a B.A. in Economics from Dartmouth College and an M.B.A. from Havard with Distinction. Upon graduation, Jason was selected for the Charles Williams Fellowship at Harvard Business School for post-graduate research in Entrepreneurship and Finance.